IRS announces changes to retirement plans for 2022
Next year taxpayers can put an extra $1,000 into their 401(k) plans. The IRS recently announced that the 2022 contribution limit for 401(k) plans will increase to $20,500. The agency also announced cost‑of‑living adjustments that may affect pension plan and other retirement-related savings next year.
Highlights of changes for 2022
The contribution limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government's Thrift Savings Plan is increased to $20,500. Limits on contributions to traditional and Roth IRAs remains unchanged at $6,000.
Taxpayers can deduct contributions to a traditional IRA if they meet certain conditions. If neither the taxpayer nor their spouse is covered by a retirement plan at work, their full contribution to a traditional IRA is deductible. If the taxpayer or their spouse was covered by a retirement plan at work, the deduction may be reduced or phased out until it is eliminated. The amount of the deduction depends on the taxpayer's filing status and their income.
Traditional IRA income phase-out ranges for 2022 are:
- $68,000 to $78,000 - Single taxpayers covered by a workplace retirement plan
- $109,000 to $129,000 - Married couples filing jointly. This applies when the spouse making the IRA contribution is covered by a workplace retirement plan.
- $204,000 to $214,000 - A taxpayer not covered by a workplace retirement plan married to someone who's covered.
- $0 to $10,000 – Married filing a separate return. This applies to taxpayers covered by a workplace retirement plan
Roth IRA contributions income phase-out ranges for 2022 are:
- $129,000 to $144,000 - Single taxpayers and heads of household
- $204,000 to $214,000 - Married, filing jointly
- $0 to $10,000 - Married, filing separately
Saver’s Credit income phase-out ranges for 2022 are:
- $41,000 to $68,000 – Married, filing jointly.
- $30,750 to $51,000 – Head of household.
- $20,500 to $34,000 – Singles and married individuals filing separately.
The amount individuals can contribute to SIMPLE retirement accounts also increases to $14,000 in 2022.
Here are Some Reasons Taxpayers should E-File their Taxes
Some taxpayers still use the old-school method of filing their tax returns: on paper. For these people, now is the time to switch and file electronically.
All taxpayers should consider joining the more than 138 million taxpayers who used IRS e-file last year. Here are the top reasons why taxpayers should file electronically in 2020:
It’s safe and secure.
- IRS e-file meets strict security guidelines. It uses modern encryption technology to protect tax returns. The IRS continues to work with states and tax industry leaders to protect tax returns from tax-related identity theft. This effort has helped put safeguards in place to make electronic tax filing a safe and secure option.
E-file helps taxpayers avoid mistakes, such as an incorrect Social Security number.
- Taxpayers who e-file receive an acknowledgement from the IRS within minutes, telling them their return has been accepted. If a return is rejected, the acknowledgement says why the IRS rejected the tax return.
People who e-file get faster refunds.
- When taxpayers e-file and use direct deposit for their refund, in most cases they can get their money in less than 21 days. On the other hand, if they mail a paper tax return to the IRS and request a refund check in the mail, it can take up to six weeks. That’s a difference of three weeks! Also, since e-filed returns are generally more accurate, there probably won’t be additional delays. Delays can be caused when the IRS finds mistakes that must be fixed before the agency can send a refund.
Business owners may be able to benefit from the home office deduction
Business owners may be able to benefit from the home office deduction
Taxpayers who use their home for business may be eligible to claim a home office deduction. It allows qualifying taxpayers to deduct certain home expenses on their tax return. This can reduce the amount of the taxpayer's taxable income.
Here are some things to help taxpayers understand the home office deduction and whether they can claim it:
- The home office deduction is available to both homeowners and renters.
- There are certain expenses taxpayers can deduct. They include mortgage interest, insurance, utilities, repairs, maintenance, depreciation and rent.
- Taxpayers must meet specific requirements to claim home expenses as a deduction. Even then, the deductible amount of these types of expenses may be limited.
- The term "home" for purposes of this deduction:
- Includes a house, apartment, condominium, mobile home, boat or similar property.
- Also includes structures on the property. These are places like an unattached garage, studio, barn or greenhouse.
- Doesn't include any part of the taxpayer's property used exclusively as a hotel, motel, inn or similar business.
There are two basic requirements for the taxpayer's home to qualify as a deduction:
- There must be exclusive use of a portion of the home for conducting business on a regularly basis. For example, a taxpayer who uses an extra room to run their business can take a home office deduction only for that extra room so long as it is used both regularly and exclusively in the business.
- The home must be the taxpayer's principal place of business. A taxpayer can also meet this requirement if administrative or management activities are conducted at the home and there is no other location to perform these duties. Therefore, someone who conducts business outside of their home, but also uses their home to conduct business may still qualify for a home office deduction.
- Expenses that relate to a separate structure not attached to the home will qualify for a home office deduction. It will qualify only if the structure is used exclusively and regularly for business.
- Taxpayers who qualify may choose one of two methods to calculate their home office expense deduction:
- The simplified option has a rate of $5 a squarefoot for business use of the home. The maximum size for this option is 300 square feet. The maximum deduction under this method is $1,500.
- When using the regular method, deductions for a home office are based on the percentage of the home devoted to business use. Taxpayers who use a whole room or part of a room for conducting their business need to figure out the percentage of the home used for business activities to deduct indirect expenses. Direct expenses are deducted in full.
Things to Remember when Considering Early Withdrawals from Retirement Plans
Many taxpayers may need to take out money early from their Individual Retirement Account or retirement plan. Doing so, however, can trigger an additional tax on early withdrawals. They would owe this tax on top of other income tax they may have to pay. Here are a few key points to know:
- Early withdrawals. An early withdrawal is taking a distribution from an IRA or retirement plan before reaching age 59½.
- Additional tax. Taxpayers who took early withdrawals from an IRA or retirement plan must report them when they file their tax return. They may owe income tax on the amount plus an additional 10 percent tax if it was an early withdrawal.
- Nontaxable withdrawals. The additional 10 percent tax doesn't apply to nontaxable withdrawals, such as contributions that taxpayers paid tax on before they put them into the plan.
- Rollover. A rollover happens when someone takes cash or other assets from one plan and puts it in another plan. They normally have 60 days to complete a rollover to make it tax-free.
- Exceptions. There are many exceptions to the additional 10-percent tax. Some of the rules for retirement plans are different from the rules for IRAs.
IRS Advisory: Prepaid Real Property Taxes May Be Deductible in 2017 if Assessed and Paid in 2017
The Internal Revenue Service advised tax professionals and taxpayers today that pre-paying 2018 state and local real property taxes in 2017 may be tax deductible under certain circumstances.
The IRS has received a number of questions from the tax community concerning the deductibility of prepaid real property taxes. In general, whether a taxpayer is allowed a deduction for the prepayment of state or local real property taxes in 2017 depends on whether the taxpayer makes the payment in 2017 and the real property taxes are assessed prior to 2018. A prepayment of anticipated real property taxes that have not been assessed prior to 2018 are not deductible in 2017. State or local law determines whether and when a property tax is assessed, which is generally when the taxpayer becomes liable for the property tax imposed.
The following examples illustrate these points.
Example 1: Assume County A assesses property tax on July 1, 2017 for the period July 1, 2017 - June 30, 2018. On July 31, 2017, County A sends notices to residents notifying them of the assessment and billing the property tax in two installments with the first installment due Sept. 30, 2017 and the second installment due Jan. 31, 2018. Assuming taxpayer has paid the first installment in 2017, the taxpayer may choose to pay the second installment on Dec. 31, 2017, and may claim a deduction for this prepayment on the taxpayer's 2017 return.
Example 2: County B also assesses and bills its residents for property taxes on July 1, 2017, for the period July 1, 2017 - June 30, 2018. County B intends to make the usual assessment in July 2018 for the period July 1, 2018 - June 30, 2019. However, because county residents wish to prepay
their 2018-2019 property taxes in 2017, County B has revised its computer systems to accept prepayment of property taxes for the 2018-2019 property
tax year. Taxpayers who prepay their 2018-2019 property taxes in 2017 will not be allowed to deduct the prepayment on their federal tax returns because
the county will not assess the property tax for the 2018-2019 tax year until July 1, 2018.
The IRS reminds taxpayers that a number of provisions remain available this week that could affect 2017 tax bills. Time remains to make charitable
donations. See IR-17-191 for more information. The deadline to make contributions for individual retirement accounts - which can be used by some taxpayers on 2017 tax returns - is the April 2018 tax deadline.